This paper offers an overview of the discussion at the OECD workshop on policies to make work pay. Proponents of these policies argued that they can promote both efficiency and equity by increasing employment and raising the incomes of the working poor. The empirical evidence from various countries supports these claims, although counselling against over-optimism about the size of the possible effects. In-work benefits or tax credits are moderately successful in increasing employment and are very well targeted on low-income households. Payroll tax reductions are less well targeted on low income, but there is some evidence that they may be effective in moving people into employment. However, cross-country differences in the effects of such policies may be substantial, depending for example on the compression of the earnings distribution, which in turn may be determined by the level of the minimum wage. Although no panacea for labour market problems, and despite administrative difficulties (which can be substantial) in implementation of such policies, the participants in the workshop concluded that making work pay is a strategy that deserves serious consideration in many countries.
V. Joseph Hotz and John Karl Scholz
This paper examines policies to support low-wage labour markets in the United States. It focuses on the earned income tax credit, describing its targeting and anti-poverty effectiveness, its effect on labour force participation, hours and family structure, and its administration. The strengths and weaknesses of the earned income tax credit are then compared with alternative ways of assisting low-wage workers. We conclude that the earned income credit, augmented by targeted employment subsidies, is a sensible way to support low-wage labour markets in the US. We see less wisdom in minimum wage increases, payroll tax reductions for low-income families, and wage rate subsidies as proposed by Phelps, at least in the US.
John Greenwood and Jean-Pierre Voyer
This paper presents evidence from two randomised experiments in Canada testing the use of financial incentives to encourage labour market participation. The Self-Sufficiency Project suggests that supplementing earnings from low-paying, full-time jobs can increase employment among long-term single parent welfare recipients, can raise the earnings and incomes of these poor families, and may entail little net increase in government transfers net of taxes. In the Earnings Supplement Project, however, the offer to partially compensate unemployment insurance recipients who returned to work quickly and experienced earnings losses had no impact on the labour force behaviour of repeat users of UI and only a small and short-lived impact with displaced workers. The paper concludes with a discussion of the complexity of designing a programme to stimulate work effort using financial incentives.
Andrew Dilnot and Julian McCrae
The UK has had in-work benefits/tax credits since 1971. From 1988 to 1999 the programme was called Family Credit (FC). In October 1999 FC is being replaced by Working Families Tax Credit (WFTC). WFTC will be significantly more generous than FC, and may be paid via employers alongside wages. A major part of the WFTC’s effect will be redistribution to families with children where at least one adult is in paid work. WFTC will make entering the labour market more attractive for lone parents, although the effect on the hours of work of those already participating is ambiguous. For couples, WFTC will tend to make labour market participation for the principal earner more likely, but WFTC discourages participation by some secondary earners. We expect the overall labour supply effect of WFTC to be positive but small.
Edmund S. Phelps
Economic inclusion – the opportunity to obtain rewarding work and to earn enough to be self-sufficient – has declined, particularly among less qualified workers. Either relative wages have fallen, or unemployment has risen, or both. No country in the OECD has entirely escaped this trend, and none has entirely recovered. A likely cause is the rise in households’ income from their wealth, including their entitlements, which adds to wage pressures at all unemployment levels. Another possible cause is the increased training and experience requirements of the new information technologies, particularly among the less educated workers (whose requirements before were minimal). There are grounds to believe that employment subsidies are a more effective response than other alternative, albeit similar, policies. These adverse developments strengthen the case for government intervention to pull up pay and drive down unemployment among less qualified workers in order to boost inclusion. The inclusion objective goes beyond any incidental reduction in income inequality that results. A wide range of negative externalities, such as crime and drug abuse, arises from falling inclusion, justifying such intervention. Subsidies to businesses for their employment of low-wage workers is a particularly attractive intervention as it is non-discriminatory and cost-effective.
Jean-Paul Fitoussi
A review of different theoretical models confirms that economists of opposing beliefs find themselves agreeing bout the usefulness of employment subsidies. In a country with a relatively high wage floor, employment subsidies reduce the cost of labour for firms. In countries where wage floors are low, subsidies can increase the net real wage of workers. In both cases, employment is likely to rise. Generally, allowing the price system to perform its allocative function while pursuing distributive objectives through the tax system is welfare enhancing. It is therefore surprising that such a remedy has not yet been implemented on a large scale in all countries suffering from labour market problems. One reason is that there may be a problem of transition, when taxpayers must fund both the old system (unemployment compensation) and the new approach (employment subsidies), before the latter has a significant impact on joblessness. Empirical evidence suggests that reductions in taxes on labour will not solve employment and distribution problems, but will, in the long run, promise progress in both.
Wage floors are in use in all industrial countries, either as negotiated minima set by employer and union bargains or through a National Minimum Wage. Yet among economists their use is highly controversial. This paper provides a brief summary of existing evidence and tries to highlight the key policy issues. Whilst aggregate employment rates appear to be at most modestly affected by moderate minimum wage levels, there are still several concerns. First, are marginal groups in the labour market unduly hurt by minimum wages? The evidence we have is that youths are most at risk but other groups (e.g. the long-term unemployed) trying to gain or regain a foothold in the labour market may also suffer. Second, whether effective lower youth minima can be used to improve the rather weak redistribution of income across households that follow from minimum wages. Third, we know relatively little about who ultimately bears the cost of a minimum wage. If it ultimately falls on consumers through higher prices, the question is who buys minimum wage goods. Improving our understanding here will ultimately suggest whether minimum wages can be an effective redistribution tool.
David Grubb
To be eligible for unemployment benefits, claimants must be able to work, must not have quit a previous job or refused a job offer without good reason, must comply with calls to interview and related instructions from the employment service, and in some cases must seek work independently. This paper describes the eligibility criteria, how they are implemented and how often they lead to a benefit sanction. A strong requirement for job search or acceptance of suitable work may in theory offset the disincentive effects that arise when benefits are paid without such criteria. A few microeconomic studies have reported fairly large behavioural impacts among individuals who face a specific obligation or have suffered a benefit sanction. The European countries in which unemployment fell most sharply during the 1990s have considerably tightened benefit eligibility criteria and their implementation.
Giuseppe Bertola
This short paper argues that a proper evaluation of policy instruments meant to “make work pay” should take into account the complex and highly heterogeneous configuration of existing labour market policies in OECD countries. Each country’s current and past implementation of more traditional instruments (such as unemployment insurance, employment protection legislation, active labour market policies, and wage-compressing institutions) presumably reflects structural labour market features on the one hand, and the political weight of each policy’s desirable and undesirable effects on the other. The paper brings this perspective to bear on wage subsidies and in-work benefits for low-pay employment relationships, discussing in particular how the implications of such instruments for income distribution, employment creation, and fiscal budgets may complement or offset those of existing policies.
